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Real Estate Entrepreneur Seeks Advice

Posted by Jamie Downey  April 10, 2009 09:30 AM

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I am considering the purchase of a two family home and renting both units. I am pretty handy and believe I can improve the property and increase its value. With interests rates this low, the monthly rent will almost cover the mortgage payment and all the expenses, although it will probably incur a cash flow loss in the first year or two. Can I deduct these losses on my tax return?

It seems to be a good time to invest in rental real estate. Home values are depressed and interest rates are at 50 year lows. These definitely seem to be the proper ingredients for a successful venture.

Under the current tax laws, rental of real estate property is generally considered a passive activity. For tax purposes, any income or loss generated by your rental property will be classified as “passive”.

Losses generated from your rental property will be limited to income generated by other passive activities, i.e. other rental real estate. It appears from your inquiry that you do not have any other properties or passive income, so this is not an option. However, there is one exception to this rule. If your modified adjusted gross income is less than $100,000, you can offset up to $25,000 in passive losses incurred during the year with other types of income, such as wages. This exception phases out between $100,000 and $150,000.

Let’s look at a hypothetical example for an individual:

Wages: $75,000
Interest income: $100
Rental loss: $(26,500)

In this case, you would be able to offset $25,000 of your loss against your wages. Your resulting net taxable income would be $50,100.

Like all tax law, the rules around rental property are filled with rules and exceptions. You can also look at IRS publication 527 and 925 for more of the details.

The Managing Your Money blog is here to help you with any tax or personal finance related questions. We encourage you to submit your question at the right side of this webpage.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
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